On April 25, the Federal Reserve released its annual Financial Stability Report. This is the first time since Trump returned to the White House that the Fed has conducted a biannual survey of financial risks. In particular, the report warns of risks associated with asset valuation pressures, noting that valuations in the U.S. equity and residential markets remain elevated, with yields on U.S. Treasury bonds remaining at their highest levels since 2008.

To put it simply, this means that some assets in the market may be overvalued, and there is a certain risk of a bubble. If these high valuations are not sustainable, they may trigger a correction or volatility in the market.

On the same day, Fed Chairman Jerome Powell once again emphasized the independence of the Fed when he attended the IMF meeting. He said the Fed needs to remain independent so that it can focus on its two core tasks: keeping inflation stable and achieving high employment.

Powell's remarks indicate that despite pressure from the government or other sources, the Fed will stick to its policy direction and be committed to maintaining economic stability and development.

The current market presents a dangerous combination of "high valuation + low liquidity + high leverage".

This report reflects the market environment and data from November last year to April 11 this year. The report summarizes the changes in the financial system in four main areas during the six months: asset valuation, corporate and household borrowing, financial sector leverage, and financing risk.

The report mentions that despite the decline in asset prices during the period of significant market turmoil, valuations across multiple assets remain high, particularly in the stock market and residential real estate.

Specifically:

Stock P/E ratio: Before the market volatility in early April, the P/E ratio of stocks remained near all-time highs. Market risk compensation: i.e. the premium of the stock, which is still well below average. Even with the recent decline, the stock price still looks high compared to analysts' earnings forecasts. However, analysts' earnings expectations have not been able to keep pace with market movements.

The state of the bond market, the report states:

U.S. Treasury yields: U.S. Treasury yields across maturities remain at their highest levels since 2008. Corporate Bond Spreads: Compared to the same period as U.S. Treasuries, although they have widened recently, they remain at a moderate level. Liquidity issues: Liquidity in many financial markets remained low and deteriorated further in April, although the market remained generally functional.

The report also looks at the U.S. housing market, noting that home prices remain high, with the home-price-to-rent ratio near an all-time high. The inflation-adjusted commercial real estate (CRE) transaction price index shows some signs of stabilization, but the upcoming refinancing demand still presents some vulnerability.

The Fed noted that the U.S. banking system remains robust and resilient, with institutions maintaining adequate capital ratios. However, the report also finds that banks' credit commitments to less regulated non-banks continue to grow, which could create new risk points.

In addition, the Fed has warned that leverage among large hedge funds is at or near its highest level since 2013. However, in early April, leverage may have decreased as these funds unwound some of their positions.

Global trade risks are the biggest concern

According to the report, financial professionals are very concerned about the Trump administration's aggressive policy agenda, especially tariff policy.

Between February and early April, the New York Fed surveyed people from broker-dealers, funds, consulting firms, and other institutions, as well as academics. The results show that 73 percent of respondents cited global trade risks as their top concern, more than double the number in the November survey. In other words, more than seven out of ten professionals are most concerned about global trade risks.

At the same time, half of respondents cited overall policy uncertainty as a major risk, up slightly from 46% in their last report in November. This suggests that in addition to trade risks, policy uncertainty is also a key concern.

Last November, 54 percent of respondents were most concerned about the sustainability of U.S. government debt, but this time that percentage has dropped to 50 percent. It seems that as new risks emerge, so do people's focuses.

According to the report, "Trade policy changes have been the most frequently cited risk in this cycle. "While many respondents see tariffs as a key risk, others believe that the domestic economy can withstand incremental tariffs on imported goods with less disruption. However, respondents generally agreed that if the trade war escalated further, there could be more serious consequences.

In addition, changes in government spending priorities and uncertainty about the extent of U.S. international engagement have exacerbated overall policy uncertainty.

The survey also showed an uptick in concerns about the recent market turmoil. Twenty-seven percent of respondents expressed concern about the health of the Treasury market, up from 17 percent last fall to 27 percent now. Concerns about foreign investors' holdings of U.S. assets and the U.S. dollar exchange rate have also become more prominent.

Powell toughly defended the independence of the Federal Reserve and escalated the game with the White House

At the IMF meeting on Friday, Powell stressed the need for central banks to stay away from political interference and ensure they can focus on maintaining stable inflation and high employment.

Although the meeting was held behind closed doors and the Fed did not officially release the full text of the speech, according to media reports, Powell's speech drew applause several times at the scene, and other officials at the meeting also expressed similar support.

U.S. President Donald Trump has publicly expressed his dissatisfaction with Powell several times recently and pressured the Fed to cut interest rates. However, Powell has been a staunch advocate of the importance of central bank independence and said that the Fed does not take politics into account when setting policy. "We are in no way subject to any political pressure," he noted, adding, "People can say whatever they want." Never mind. That's not a problem. But we will strictly follow our own way, without regard to politics or any other extraneous factors. ”

In his remarks last week, Powell also mentioned that he and his colleagues can only be removed if they have "valid reasons," reiterating that the Fed's independence is widely understood and supported not only in Washington, but also in Congress.

The Fed plans to hold its next monetary policy meeting on May 6-7. The Fed is widely expected to keep interest rates unchanged for the third time in a row. Powell and other officials have previously said they are leaning toward holding the line for now, in part because of concerns that Trump's tariffs could lead to persistent inflation. This means that the Fed wants to watch more economic data before making a decision to avoid the economic volatility that could be triggered by acting too early.

In Jingtai's view, Powell's speech at the IMF meeting once again emphasized the importance of central bank independence and indicated that the Fed will continue to set monetary policy based on economic conditions rather than political pressures. This is essential to maintain economic stability and market confidence.

Investors should pay attention to the upcoming Fed meeting and its subsequent policy developments in order to make more informed investment decisions.